In the LOOP: Exchanges CME, ICE face off for USGC light sweet crude benchmark

The battle to secure the benchmark for US light sweet crude on the US Gulf Coast crude heated up Monday as commodities exchange CME Group launched its physically delivered NYMEX WTI Houston Crude Oil futures and options contracts, just two weeks after chief competitor Intercontinental Exchange debuted its own USGC WTI marker.

CME HCL reflects "export-grade WTI" on an FOB basis at three Enterprise Products terminals in the Greater Houston refining area, according to CME. That contract will compete with ICE Permian WTI Futures, which commenced trading October 22 and represents the value of physical crude oil delivered to the Magellan East Houston terminal.

S&P Global Platts competes with both companies in providing pricing benchmarks to commodities markets.

"It's become clear the status of the US light sweet crude market has moved from Cushing and the Midwest to the US Gulf Coast export market," said Sandy Fielden, director of oil research with Morningstar. "It's clear every new barrel of shale that gets produced now is destined for export. All the new pipelines built out of the Permian are headed to the docks, not the refineries."

"All other things being equal, the price of light sweet crude is determined in Houston, not Cushing, because the marginal export barrel is setting the value," Fielden added.

CME has told Platts it sees its HCL as complementary -- not a competitor -- to the current North American crude oil futures contract, its NYMEX WTI Light Sweet Crude Oil. The new CME WTI Houston contract can be traded as an outright value and as a spread versus NYMEX WTI at Cushing, Oklahoma. NYMEX WTI had 2.1 million lots of open interest on Friday. Each lot is a 1,000-barrel contract.

However, the increase in US crude exports has left many market participants searching for a new, more-relevant benchmark, which led ICE and CME to launch their Houston WTI contracts.

ICE forced CME's hand when it announced Permian WTI in July. CME's NYMEX WTI for years has faced headwinds in the form of questions around quality, and a changing landscape that sent more crude to the USGC. CME recognized the latter, saying in December 2011 it would "work with oil market participants to discuss developing a new Gulf Coast crude oil futures contract at the ECHO Terminal" in Houston, which at the time was under construction.

ICE is happy with the initial two weeks of trading on Permian WTI, an executive said. "We've had 21 companies trade so far, which is a great start," said Jeff Barbuto, ICE vice president and global head of oil sales. "The feedback from the customers has been positive and we think it can grow into a long-term benchmark for US pricing. Eight-hundred lots of open interest is really constructive."

On Friday, ICE Permian WTI had 792 lots of OI and daily volume of 159, and the curve extends into February 2019. That compares with 653 lots of OI and a daily volume of 472 one week earlier, ICE data show.

Despite the common thread of WTI, the three contracts reflect different barrels as summarized in the following table:

Quality will remain an important determining factor in the success of these contracts as crude exports continue to rise. Citing Magellan data, Barbuto said the six-month average (April-September) for WTI into MEH off the Longhorn and BridgeTex pipelines was 42.4 API and 0.1281% sulfur.

Furthermore, while the US crude benchmark is in flux, Dated Brent has remained the largest global benchmark, even as global crude flows have continued to evolve, particularly with the growth in US exports. Indeed, most European buyers and many Asian buyers continue to price their US crude imports against either Dated Brent or ICE Brent.